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U.S. Airlines Cap Turnaround with 4Q Profits

Most of the major U.S. airlines will report a profit for the fourth quarter of 2010, capping a turnaround year for the industry. Wall Street expects more improvement this year, even with fuel prices rising and millions of would-be travelers still out of work.

Delta Air Lines Inc. is expected to report its third consecutive quarterly profit and a full-year net income above $1 billion when it kicks off the earnings season on Tuesday. Southwest Airlines Co., United Continental Holdings Inc. and US Airways Group Inc. are also expected to post profits for the quarter and year. American Airlines parent AMR Corp., however, will likely be in the red, although both the quarterly and full-year losses should be about a third of those reported a year ago.

Analysts surveyed by FactSet Research estimate that the top five airlines earned a combined $3.44 billion this year, excluding special gains and charges. On that basis, losses totaled $4.36 billion in 2009, when United and Continental were still separate carriers. This year, adjusted profit for the top five is expected to rise to $4.68 billion.

The airlines have limited the number of seats for sale, allowing them to push up fares. They've all benefited from improved demand, especially for business travel. Fuel prices were stable for most of last year. But how long will that last?

Where Low Airfares Have Gone Online

Airline consultant Michael Boyd doesn't see the number of passengers rising much in 2011, and cautions that it could even fall. He cited continuing high unemployment and the airlines new-found discipline on capacity and routes as the reasons.

Airline departures are up just 0.9 in the first quarter compared with a year earlier, he wrote — "more statistical noise than additional service.

Oil is trading around $91 a barrel and many analysts expect the price to top $100 sometime this year, possibly in the spring. That means refined products like jet fuel will cost more. UBS analyst Kevin Crissey on Thursday cut his 2011 profit expectations for all the big airlines, writing that he now expects airlines to pay on average $2.63 per gallon for jet fuel before taxes and hedges, 20 cents more than before. He widened his expected loss for AMR.

Crissey says revenue should be strong in the first quarter of 2011. He expects the airlines to try and counter increased fuel costs with higher fares. They raised ticket prices in late December when the price of oil hit a two-year high. Crissey estimates that travelers will pay for about half of the higher fuel tab.

"Revenue trends look good but are unlikely to fully offset the increased fuel expense," he wrote.

Most airlines have been hedging against rising fuel prices, using financial instruments that lock in lower fuel prices if oil jumps to a certain price. US Airways, however, has no hedges in place, believing that a stronger economy — and thus higher fares — generally accompany higher fuel prices.

Avondale Partners analyst Bob McAdoo says fuel is "the wild card" that will determine whether airlines' profits grow in 2011.

Besides fuel costs, Wall Street is also watching how many seats the airlines put back in service now that they're making money again. Most airline executives have insisted they'll only add seats if the demand is there. And airlines are willing to drop routes that are earning little profit or losing money. United confirmed on Friday that it will drop its seasonal Denver-to-London flights, adding a fourth daily flight from Washington Dulles to London instead.

Spokesman Rahsaan Johnson said the revenue projected for the Denver flight was lower than the company's goals. United competed head-to-head with British Airways on the Denver-London flight.

Airlines will add just 1 percent to their domestic capacity in 2011, Barclays analyst Gary Chase wrote on Friday. Most of that will come from discount airlines. He expects international capacity to rise 7 percent.

Chase believes that 2011 will bring the industry's "best ever operating profit and substantial free cash flow, just a short time after economic recovery began."

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